The US Tax System Just Keeps On Getting More And More Progressive

One of the regular calls in American political debate that really rather boggles is that one that the country needs to have a truly
progressive taxation system. The reason it boggles is that the US taxation system is already the most progressive among the rich nations. Yes, I know, this isn't what you normally hear but it is true. Further, the US tax system has become progressively more progressive over recent decades. Again, that's not what you normally hear but it is also true.

The data demonstrates that the U.S. individual income tax continues to be very progressive, borne mainly by the highest income earners.

In 2012, 136.1 million taxpayers reported earning $9.04 trillion in adjusted gross income and paid $1.1 trillion in income taxes. All income groups increased their income and taxes paid over the previous year. The top 1 percent of taxpayers earned their largest share of income since 2007 at 21.9 percent of total AGI and paid their largest share of the income tax burden since the same year at 38.1 percent of total income taxes. In 2012, the top 50 percent of all taxpayers (68 million filers) paid 96.7 percent of all income taxes while the bottom 50 percent paid the remaining 3.3 percent. The top 1 percent (1.3 million filers) paid a greater share of income taxes (38.1 percent) than the bottom 90 percent (122.4 million filers) combined (29.8 percent). The top 1 percent of taxpayers paid a higher effective income tax rate than any other group at 22.8 percent, which is nearly 7 times higher than taxpayers in the bottom 50 percent (3.28 percent).

The history of these numbers is nicely captured by this chart from Mark Perry:

Some will argue that the US doesn't really have a progressive tax system because it doesn't have very high rates like Sweden, Denmark or France do. But that's not actually the meaning of progressive (it might be the meaning of Progressive as a political movement but that's another thing). With respect to taxation what we mean is the difference in rates paid between the poor and the rich. If the poor pay a 1% tax rate and the rich 2%, then that's a progressive system, the rich are paying a higher portion of their income than the poor. If the poor are paying 1% and the rich 3% then that's a more progressive system: because the rich are paying a yet higher portion of their income in tax. This is just what progressive means here.

And the US tax system as a whole is very much more progressive than that of other rich nations. This is largely because the US relies, at the Federal level, almost entirely on taxes upon income. Other countries raise a great deal more through regressive taxations upon consumption (like a VAT or sales taxes). It is true that when we add in the State and more local taxation systems, where there are at times those sales taxes, the US system becomes a little less progressive. And the total system, the adding together of tax and the welfare system is considerably less progressive in the US. For there's less redistribution from rich to poor in the US than there is in most other rich countries. But all three of these things are still true: the total US tax and welfare system is less progressive than most others, the tax system in general is more progressive than most others and the Federal tax system is very much more progressive than most others.

Further, and entirely contrary to what we generally get told, the US tax system has been becoming more progressive over the decades since Reagan came into power and, as we're told, decided to slash taxation upon the rich. For, as that chart shows, those rich, that 1%, are paying an ever larger portion of that tax bill. Yes, even though the US has cut tax rates, even though it has, by world standards, reasonably low income tax rates upon high income earners, it's still true that the US tax system is more progressive than most others and also that it has become more progressive again in recent decades.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am....